PSO Pearson Plc

By Simon Zekaria 

LONDON--Shares in Pearson PLC plunged more than 30% on Wednesday after the world's largest education company issued a profit warning for 2018, warned of lower future dividends and said it plans to sell its stake in its Penguin Random House publishing joint venture.

Pearson blamed further declines in North American sales of higher-education course materials for the warning but said it still expects its 2016 operating profit to be in line with its previous guidance.

Rapid growth in employment and increasing education regulation has reduced higher-education enrollments in the U.S., which has put pressure on Pearson's business even as it has sought new sources of growth in emerging economies such as Brazil and China. Pearson is also grappling with a difficult transition to digital formats from print for many of its higher-education products.

The company said revenue was down 30% in the final three months of the year, resulting in an 18% full-year decline that it called unprecedented. Shares were down as much as 30.4% in London trading earlier Wednesday and lately were down 29% to GBP5.74 ($7.11).

"There is no getting around how tough it is," Chief Executive John Fallon said of the education sector in a call with reporters. He admitted the company got "big calls" wrong on U.S. college enrollments and revenue forecasting.

Pearson said it plans to sell its 47% stake in U.S.-based Penguin Random House--one of the world's largest book publishers--to bolster its finances and invest in other parts of its business. Its joint-venture partner, German media company Bertelsmann SE, said it was open to raising its stake in the publishing house "provided the financial terms are fair." The publishing house was formed in 2013 when the two companies combined their book-publishing businesses.

Three months ago, Pearson said Penguin Random House was performing better, partly from movie-tie-in sales for books such as "The Girl on the Train" by Paula Hawkins in addition to best-selling new work by authors Colson Whitehead and John Le Carré.

"The ball is very much in Bertelsmann's court," Pearson Chief Financial Officer Coram Williams told reporters. In the absence of a deal, Pearson would seek to recapitalize the stake and extract a dividend, he said.

Pearson's share price has almost halved in the past three years and the company has laid off thousands of employees amid sales pressures in key markets. It has sold several assets during the period, including the Financial Times newspaper and its 50% noncontrolling stake in the publisher of the Economist magazine, to fund its growth across global education, raising billions of dollars.

While higher education in North America remains Pearson's biggest problem, the company also has faced setbacks in its efforts to capitalize on the Common Core primary- and secondary-education standards that have faced a backlash in several U.S. states.

"This is a tough time for the company," Mr. Fallon said on Wednesday. "We have to move decisively and urgently."

Pearson said its 2016 revenue fell 8% on an adjusted basis. It expects to report an adjusted operating profit, before restructuring costs, of GBP630 million, which is in line with previous forecasts after GBP55 million in savings on staff compensation.

For 2017, it sees operating profit on the same basis of GBP570 million to GBP630 million, with adjusted earnings per share of 48.5 pence to 55.5 pence. Pearson also scrapped its 2018 earnings guidance.

The company sees its 2016 dividend at 52 pence, in line with its guidance. However, it said that from 2017 it intends to "rebase" its dividend to reflect portfolio changes, increased investment and earnings guidance.

"Management are still clinging to the mantra of a longer-term stable business, but with visibility so low on their key profit driver [of] U.S. higher education and given the increasing signs of structural pressure, we do not see how management can have confidence they can turn things around," Liberum analyst Ian Whittaker said.

News Corp, which owns Dow Jones & Co., publisher of The Wall Street Journal, competes with Pearson's book publishing operations.

Ian Walker in London and Ulrike Dauer in Frankfurt contributed to this article.

Write to Simon Zekaria at simon.zekaria@wsj.com

(END) Dow Jones Newswires

January 18, 2017 08:12 ET (13:12 GMT)

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